View from City Road: A changing mix in the debt markets

A 60 per cent increase in Morgan Grenfell's turnover in emerging-market debt trading, the powerhouse behind its much-improved results last week, now turns out to be one of the less spectacular performances of 1993. The bank has dropped from first to sixth place in the world debt traders' league table compiled by Risk magazine. Top honours are now taken by JP Morgan, which trebled its turnover from dollars 64bn to dollars 193bn.

Only a year ago, JP Morgan - which has a 75-member research team for emerging markets - was level pegging with Morgan Grenfell, part of Deutsche Bank. But now it is dollars 85bn ahead, followed closely by Salomon Brothers, which also trebled its turnover to dollars 154bn. US traders' spectacular performance was helped by the enormous interest suddenly shown in the market by domestic investment institutions such as pension funds.

Of course, turnover is not always proportional to profitability, especially in a market that has ballooned from dollars 400bn to dollars 1,600bn in a year. Institutional investors did well but dealing spreads for traders narrowed sharply at the commodity (ie Latin American) end of the market.

Morgan Grenfell made up for some of its lower-volume growth with a nice line in specialities such as Russian and Bulgarian debt, where dealing is more profitable but turnover lower than with Latin American debt.

Will last year's boom be this year's bust? The entire market felt a chill wind in February, so that after a 40 per cent rise in 1993 it was off 12 per cent by this month, with rumours that some big traders had lost a packet.

But this is not a uniform market. Brady bonds - deep-discounted paper linked to US Treasury bonds and issued in exchange for bank debt - have been tracking the US long bond ever more closely.

Other emerging-market debt can be far more volatile, especially the so-called 'exotics'. These are the no-hopers such as Sudan and Liberia, the traders' equivalent of penny stocks, where enormous gains have been made in the bull market. It would be rash to bet on a repeat this year.